Cryptocurrency

Cryptocurrency has become an integral part of the new financial world, attracting not only numerous individual investors but also significant businesses with its prospects. The rules of the game in this rapidly growing market are becoming clearer with each passing year. However, the volatility and specific risks associated with digital assets remain, requiring a thorough understanding of all aspects before investing in this market.

Cryptocurrency is a form of digital currency. It lacks a physical expression, and its value is independent of any particular government. The term “cryptocurrency” has gained widespread use due to the use of encryption (cryptography) to verify transactions. Encryption is essential for ensuring reliability and security, with all digital funds existing solely in the online space.

In the traditional monetary system, an intermediary, typically a bank, is required to transfer money from one person to another. Cryptocurrency operates differently: there is no involvement of banks in exchanges. Cryptocurrency is built on blockchain technology, a chain of information blocks used for transferring digital money from person to person without intermediaries. These transactions occur instantly and irreversibly.

A notable advantage of the cryptocurrency sphere, attracting new users, is the anonymity of transactions, meaning investment returns are not subject to taxation. However, the drawbacks persist, including extremely high volatility and the limited use of cryptocurrencies in daily life due to legislative restrictions.

Bitcoin, created in 2009, was the first cryptocurrency and remains the most well-known to date. The rise and fall of Bitcoin directly impact the prices of other cryptocurrencies. According to CoinMarketCap, as of the end of 2022, the number of cryptocurrencies reached 22,000.

Cryptocurrency assets can be categorized into various types: altcoins, tokens, and stablecoins.

Altcoins: These are alternative coins, any cryptocurrencies with their own blockchain (excluding Bitcoin, which is considered a separate asset outside categories). Some altcoins resemble Bitcoin, while others focus on implementing new tools and expanding capabilities.

Tokens: These are cryptocurrencies that also serve as digital assets but do not have their own blockchain. Instead of mining, tokens are issued in full emission. In simpler terms, creating a token is technically much easier than creating an altcoin. Companies create these assets to raise funds for their projects or ensure the functionality of products. In turn, investors receive guarantees that the company will fulfill its obligations.

Stablecoins: Cryptocurrency whose value is tied to tangible assets such as the dollar, gold, oil, etc. Unlike regular cryptocurrencies, stablecoin values are extremely stable. Unlike the fiat money system, the stablecoin’s value is tied to the value of the underlying asset.

Bitcoin and other cryptocurrency prices fluctuate throughout the day, week, and month. On the contrary, stablecoin values are extremely stable. Unlike regular cryptocurrencies, the stablecoin’s value is tied to the value of the underlying asset: it can be the exchange rate of a real currency (e.g., the dollar or yuan), the value of a cryptocurrency (e.g., Bitcoin), the price of a commodity (e.g., oil, gold, etc.), or a security (shares of a specific company).

Tether (USDT) is the most popular and largest stablecoin by market capitalization, standing at $83.2 billion according to CoinMarketCap. The daily trading volume of USDT almost exceeds Bitcoin’s daily trading volume by nearly 30%.

It is essential to note that being pegged to the price of a tangible asset does not mean that a stablecoin is backed by that asset. The lack of real collateral makes stablecoins similar to fiat money—value is based on people’s trust rather than actual worth.

Cryptocurrency Storage

Specialized cryptocurrency wallets—physical devices or online programs that ensure the secure storage of private keys to digital assets—are used to store and transfer digital money between users. While some exchanges may offer cryptocurrency storage services, not all exchanges and brokers automatically provide such services.

Various cryptocurrency wallet providers and two types of cryptocurrency storage—”hot wallets” and “cold wallets”—exist. A hot wallet uses online programs to protect private keys to assets. In contrast, a cold wallet (also known as a hardware wallet) uses standalone electronic devices to securely store private keys.

Overall, due to the high volatility, cryptocurrency is considered a high-risk investment. There is a chance of losing a significant portion of funds when investing, and investors must be willing to accept the possibility of losing their entire capital for the potential significant profit growth in the future.

This market stands out for the high emotional involvement of its participants, a distinctive feature of the cryptocurrency market. Cryptocurrencies react to practically everything—from macroeconomic factors, mainly related to the monetary policy of the United States, to technical news about technology improvements or, conversely, blockchain system hacks, rumors, and jokes from well-known businessmen.